ASIA-PACIFIC PRIVATE EQUITY REPORT 2015
About Bain & Company’s Private Equity business
Bain & Company is the leading consulting partner to the private equity (PE) industry and its stakeholders. PE
consulting at Bain has grown fivefold over the past 15 years and now represents about one-quarter of the firm’s
global business. We maintain a global network of more than 1,000 experienced professionals serving PE clients.
Our practice is more than triple the size of the next-largest consulting firm serving PE firms.
Bain’s work with PE firms spans fund types, including buyout, infrastructure, real estate and debt. We also work
with hedge funds, as well as many of the most prominent institutional investors, including sovereign wealth funds,
pension funds, endowments and family investment offices. We support our clients across a broad range of objectives:
•
Deal generation: We help develop differentiated investment theses and enhance deal flow by profiling industries,
screening companies and devising a plan to approach targets.
•
Due diligence: We help support better deal decisions by performing due diligence, assessing performance
improvement opportunities and providing a post-acquisition agenda.
•
Immediate post-acquisition: We support the pursuit of rapid returns by developing a strategic blueprint
for the acquired company, leading workshops that align management with strategic priorities and directing
focused initiatives.
•
Ongoing value addition: We help increase company value by supporting revenue enhancement and cost
reduction and by refreshing strategy.
•
Exit: We help ensure funds maximize returns by identifying the optimal exit strategy, preparing the selling
documents and prequalifying buyers.
•
Firm strategy and operations: We help PE firms develop their own strategy for continued excellence, by devising
differentiated strategies, maximizing investment capabilities, developing sector specialization and intelligence,
enhancing fund-raising, improving organizational design and decision making, and enlisting top talent.
•
Institutional investor strategy: We help institutional investors develop best-in-class investment programs across
asset classes, including PE, infrastructure and real estate. Topics we address cover asset-class allocation,
portfolio construction and manager selection, governance and risk management, and organizational design
and decision making. We also help institutional investors expand their participation in PE, including through
co-investment and direct investing opportunities.
Copyright © 2015 Bain & Company, Inc. All rights reserved.
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Asia-Pacific Private Equity Report 2015 | Bain & Company, Inc.
Contents
1.
Asia-Pacific private equity: Cleared for takeoff? . . . . . . . . . . . . . . . . . . . . . pg. 1
2.
What happened in 2014? A great year... for some . . . . . . . . . . . . . . . . . . . pg. 3
a. Returns: Building momentum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . pg. 3
b. Exits: An IPO revival. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . pg. 4
c. Investments: A return to peak performance . . . . . . . . . . . . . . . . . . . . . . pg. 5
d. Fund-raising: A clear flight to quality. . . . . . . . . . . . . . . . . . . . . . . . . . . pg. 7
3.
Outlook: What will it take to sustain momentum? . . . . . . . . . . . . . . . . . . . . pg. 9
a. What we feel good about right now. . . . . . . . . . . . . . . . . . . . . . . . . . . pg. 9
–– Healthier portfolios
–– A push for more control
–– Fewer, stronger GPs
–– More opportunity
–– Stronger investor commitment
–– Bullishness on the ground
b. Areas of concern. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . pg. 13
–– A renewed push for performance
–– Sustained exit momentum
–– Manageable competition and pricing
–– Stable geopolitical and macroeconomic conditions
c. Country perspectives: Diverse markets, diverse outlooks . . . . . . . . . . . . pg. 18
4.
Taking a more active role in winning. . . . . . . . . . . . . . . . . . . . . . . . . . . . pg. 23
a. The power of portfolio activism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . pg. 23
b. Identifying barriers to value creation: A self-assessment. . . . . . . . . . . . . pg. 26
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Asia-Pacific Private Equity Report 2015 | Bain & Company, Inc.
1. Asia-Pacific private equity: Cleared for takeoff?
Private equity (PE) in the vibrant Asia-Pacific region finally began to reward investor patience in 2014 as the market
broke out of a sobering two-year slump and posted its best across-the-board performance to date (see Figure 1.1).
The industry continues to move through a difficult multiyear transition as PE firms strive to clean up portfolios
and build sustainable performance. But a number of important developments over the past year signal the market
may be reaching a critical turning point.
Since the slump began in 2011, we concluded that the recovery and long-term growth of the PE industry in
the Asia-Pacific region will depend on two overarching factors: General partners (GPs) will have to find a way to
return more capital to their investors and returns on investment will have to improve. The past year brought
good news on both fronts.
The market hit a key milestone in early 2014 when investors—or limited partners (LPs)—became cash-flow positive
in the region for the first time, meaning distributions are exceeding new capital calls, opening the door for new
commitments. Median returns across the region also grew encouragingly, raising hopes for stronger results ahead.
This critical recycling of capital punctuated a year of standout performance among the PE firms doing business
in the region, especially those in the top quartile. After three years of steep declines, exit value surged by 118% to
a new all-time record of $111 billion, helping some GPs purge older companies lingering in their portfolios and
allowing them to return a meaningful chunk of capital to LPs, which should help spur new fund-raising activity.
The value of new investments, meanwhile, also soared to a new record of $81 billion, as firms found new ways
to put piles of dry powder (capital raised but not yet invested) to work.
Figure 1.1: Across the board, Asia-Pacific PE activity took off in 2014
Deal value soared to a new record
$120B
1,000
100
81
40
1,000
800
86
75
11
Deal value
12
13
14
0
100
80
400
200
2009 10
Deal count
11
12
Exit value
Note: Real estate and infrastructure funds are excluded in the three graphs
Sources: AVCJ; Preqin
Page 1
13
14
Exit count
0
20
0
43
37
40
20
0
55
60
51
46
40
200
$120B
600
400
39
2009 10
100
60
50
20
0
111
600
59
56
110
80
67
60
800
$120B
Fund-raising regained steam
Asia-Pacific–focused closed
funds (by close year)
Asia-Pacific PE
exit market
Asia-Pacific PE
investment market
80
Exit value reversed a three-year slide
39
43
21
2009 10
11
12
13
14
Asia-Pacific Private Equity Report 2015 | Bain & Company, Inc.
The obvious question following a period of such extreme volatility is whether the newfound momentum can
continue. And there’s no doubt that will pose a challenge. On the deal side, rising asset prices and heavy competition
will likely make it more difficult to close purchase transactions in the coming year, not less. Exit activity will depend
heavily on continued strength in the region’s fickle equity markets. Much of 2014’s rebound in both deals and
exits stemmed from a return of massive transactions involving the biggest and strongest PE firms—sometimes
in partnership with large sovereign wealth funds (SWFs) or other LPs. Maintaining momentum in 2015 and
beyond will likely require participation from a broader set of firms.
But for PE investors hoping to capitalize on the region’s robust long-term growth story, there is plenty to feel good
about. GPs are making real progress in cleaning out a glut of uneconomic deals stemming from the surge of
speculation that preceded the global financial crisis. They hold a record amount of dry powder and have ample
motivation to spend it. New activity has demonstrated an important shift toward “path to control” mechanisms
in minority deals, which give firms with minority stakes more ability to affect performance. And though a steady
shakeout of weaker players is proceeding at a snail’s pace, the industry overall is getting stronger. More firms are
learning how to compete in a PE market that rewards differentiated strategies and capabilities.
We’ve devoted Sections 3 and 4 of this report to an examination of what it will take for the industry to sustain its
new momentum and what individual firms must do to retain the interest of an increasingly discerning group of
LPs. The paradox of industry growth is that maturity makes it harder to generate superior returns, meaning firms
will have to redouble efforts to squeeze more from their existing portfolios with robust value-creation plans and
an activist approach to engaging with management. Overall, though, we are encouraged. While the Asia-Pacific
PE industry will continue to experience some key challenges, 2015 should deliver important progress in laying
a foundation for healthy, more sustainable growth.
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Asia-Pacific Private Equity Report 2015 | Bain & Company, Inc.
2. What happened in 2014? A great year... for some
One of the notable aspects of the recent downturn in the Asia-Pacific PE market is that LPs never lost faith in the
region’s growth story. Investors may have trimmed new allocations to the market as they waited for distributions
to appear. But industry data shows they are eager to maintain exposure to a diverse set of economies with a history
of strong economic growth and expanding legions of middle-class consumers. In 2014, the industry gave investors
a taste of why their faith was warranted. But it also showed that the Asia-Pacific region is increasingly becoming
a winner-take-all market.
Returns: Building momentum
It’s hard to overestimate the importance of LPs turning cash positive in 2014. Investors have enthusiastically pumped
large amounts of capital into the region for more than a decade, only to be disappointed by anemic distributions
and sliding average returns. As they became over-allocated in crucial markets such as China and India, they began
to look elsewhere in the world with new capital, waiting for the Asia-Pacific market to catch up.
In the first half of 2014, that finally happened: LPs in Asia-Pacific funds got back almost $1.20 for each dollar
called by GPs as PE firms locked in gains from older vintages and passed them back to investors (see Figure 2.1).
Our data doesn’t include infrastructure or real estate funds because they tend to exist in their own orbit with a
different set of dynamics. But if you were to include these two sectors, Asia-Pacific investors became cash flow
positive in late 2013, an even stronger indicator of a consistent trend toward healthier distributions.
Figure 2.1: Investors are getting their cash back and seeing growing returns—two signs of a turning point
LPs were cash positive in 2014 for the first time
Returns are improving
Capital called and distributed for Asia-Pacific–focused funds
Average net IRR of Asia-Pacific–focused funds
$40B
35%
30
20
25
0
20
Expectations for emerging Asia
15
-20
10
-40
-60
5
2005
06
07
Net cash flows
08
09
10
11
Distributions
12
13
H1 14
0
2001
02
03
04
05
06
07
Vintage year
Contributions
Note: Real estate and infrastructure funds are excluded in both graphs
Source: Preqin, based on latest performance data available (mostly June 2014 or September 2014)
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08
09
10
11
Asia-Pacific Private Equity Report 2015 | Bain & Company, Inc.
For LPs to keep making new commitments, however, it is equally crucial that those distributions come with
improved returns. And that’s happening, too.
Older vintage funds in many cases have managed to surprise investors with better-than-expected returns over the
past year. And while returns from younger vintages can fluctuate significantly over time, they are showing early
promise. Median returns from 2011 vintage funds, still very young by PE standards, moved closer to the 16% net
IRR that most LPs expect from their PE investment in the emerging Asia region. Top-quartile returns from the
2011 vintage pushed toward 23%. Even returns for the bottom quartile improved, signaling that the industry’s
ongoing shakeout is helping shore up average returns from below. Overall, while the market’s median internal
rate of return (IRR) still trails the off-the-charts performance of the pre-crisis period, the trend is positive. Median
IRR rose from 9% to nearly 11% between late 2012 and June 2014, while returns for top-quartile funds hit 19%.
As encouraging as these signs are, however, sustaining growth will become increasingly challenging at the individual
fund level. The days are gone when GPs could expect to easily find companies at attractive multiples and sell them
three years later into a rising market. As we discuss in Sections 3 and 4, PE firms in a crowded Asia-Pacific region
will have to be increasingly creative in how they generate returns. Data gathered by the Emerging Markets Private
Equity Association (EMPEA) shows that investors have softened their expectations for the Asia-Pacific market
somewhat as the industry matures and becomes more competitive. But they will continue to favor those GPs that
can deliver consistent, above-market performance, making life that much more difficult for everyone else.
Exits: An IPO revival
After three years of steady declines, 2014’s surge in exit value was perhaps the year’s most encouraging development.
It allowed PE funds in the Asia-Pacific region to exit investments worth $111 billion, more than double the value of
2013 exits and a touch higher than the previous all-time record of $110 billion in 2010. Exit value had bottomed
out at $51 billion in 2013, when the Chinese government temporarily closed the nation’s renminbi-denominated
IPO market to combat fraud. But the reopening of the Chinese IPO channel led to a 218% surge in exit value in
Greater China (China, Hong Kong and Taiwan), owing in large part to the $25 billion Alibaba offering in September
2014 (see Figure 2.2). Even excluding that massive deal, overall exit value still rose 69% and the absolute
number of exits jumped 25%.
The sale of large assets—both IPOs and trade sales—also led to big double-digit percentage gains in South Korea,
Japan and Australia. The second-biggest exit in the region last year was the $5.8 billion trade sale of South Korea’s
Oriental Brewery to Anheuser-Busch InBev. The $3.5 billion trade sale of Arysta LifeScience gave a welcome boost
to the total in Japan. The good news didn’t extend to the entire region, however. The total value of exits in India
and Southeast Asia fell 10% and 9%, respectively. Deal count was relatively healthy, but neither market reaped
the benefit of any large, market-moving exits.
The overall surge in exits regionwide has helped GPs begin to trim old deals from their portfolios. Although the
total value of unrealized capital in PE funds rose 1% to a record $244 billion in 2014, it was almost flat for the first
time since 2008, after five years of double-digit growth. Most important, it declined 14% for older vintage funds.
The median holding period of companies in Asia-Pacific portfolios fell to 4.7 years in 2014 after six years of steady
growth, another sign that GPs are succeeding in distributing more capital to investors and rebalancing their
portfolios toward newer vintages.
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Asia-Pacific Private Equity Report 2015 | Bain & Company, Inc.
Figure 2.2: Public offerings soared when China reopened its IPO channel
IPO growth boosted Asia-Pacific exit value
China's robust equity market helped spur activity
Weekly stock prices on Shanghai Composite Index
(indexed to June 13, 2013)
Asia-Pacific PE exit value (by type)
$125B
110
Secondary
100
86
51
46
Count
1.0
IPO
25
0
1.1
Trade
sale
75
75
50
1.2
111
0.9
2009
10
11
12
13
14
229
477
479
398
395
493
0.8
Jan 2014
Apr 2014
Jul 2014
Oct 2014
Jan 2015
Note: Real estate and infrastructure deals are excluded
Sources: Thomson; AVCJ
Investments: A return to peak performance
At $81 billion, Asia-Pacific deal value set an all-time record in 2014, topping the previous mark of $77 billion set
in 2007 (see Figure 2.3). The number of individual deals grew 14%, to 742, and average deal size increased
to $110 million, from $77 million in 2013. Overall, the market experienced a robust 63% increase in total value
compared with 2013 totals and beat the previous five-year average by 50%.
Once again, Greater China led the charge (see Figure 2.4). After a dismal year in 2013, the market enjoyed a
surge in activity, spurred by a number of $1 billion-plus mega-deals. With the exception of Japan, each of the
Asia-Pacific markets saw growth in deal value. But Greater China’s 182% increase, to $41 billion, dwarfed activity
elsewhere in the region.
A major contributor to the overall value surge in the region was the reemergence of sovereign wealth funds as
buyers. Temasek Holdings, the Singapore SWF, claimed the region’s biggest deal with a $5.7 billion investment
in Hong Kong-based beauty retailer A.S. Watson Group. A Temasek-led investor group also paid $1.2 billion to buy
an additional stake of agribusiness company Olam International in Singapore. Khazanah Nasional, the Malaysian
SWF, helped fuel a $2.4 billion pre-IPO investment in China Huarong Asset Management.
It is important to note that only a select set of financial investors had the size and clout to address deals of this
magnitude, suggesting it will be critical for participation to broaden to less massive players if momentum is to
build over the long term. Still, in China, a surge in pre-IPO deals led to more activity among smaller funds and
several local Chinese GPs found ways to tap deals that were previously only open to state-owned enterprises (SOEs).
One prime example was a $5 billion investment in Sinopec led by RRJ, Hopu and other PE investors. Altogether
there were six mega-deals in Greater China that topped $1 billion in value. Excluding those, China deal value would
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Asia-Pacific Private Equity Report 2015 | Bain & Company, Inc.
Figure 2.3: Asia-Pacific deal value hit a new record, but fewer PE funds participated
Gold rush
Asia-Pacific PE investment deal value
Global
financial
crisis
$100B
77
80
61
60
40
20
Down-trend
9
2001
02
67
59
50
39
32
10
81
56
51
Lift-off
17
19
03
04
05
06
07
08
09
10
11
12
13
14
04
05
06
07
08
09
10
11
12
13
14
0
Number of new Asia-Pacific active PE firms
150
100
50
0
-50
2001
02
03
Notes: For deal value, real estate and infrastructure funds are excluded; a fund is considered active for six years after its first investment
Sources: AVCJ; Preqin
Figure 2.4: China’s deal market soared with the return of the mega-deal
Deal value grew in most countries, but Greater China led the pack
Six Greater China mega-deals worth $18 billion triggered the surge
Total value of Asia-Pacific deals over $1 billion
Investment value of Asia-Pacific deals
$100B
81
80
67
56
60
40
59
50
39
Count
Average
deal size
($M)
SEA
6%
KOR
JAP
ANZ
34%
-7%
18%
IND
10%
$30B
26
21
20
Other
17
14
16
10
GC
20
0
CAGR
(13-14)
63%
2009
10
11
12
13
14
418
656
797
562
651
742
89
86
84
103
77
110
8
Greater
China
182%
0
Count
2009
10
11
12
13
14
6
10
8
11
6
11
Notes: Real estate and infrastructure deals are excluded in both graphs; SEA is Southeast Asia, KOR is South Korea, JAP is Japan, ANZ is Australia and New Zealand, IND is India,
GC is Greater China (China, Hong Kong, Taiwan)
Source: AVCJ
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Asia-Pacific Private Equity Report 2015 | Bain & Company, Inc.
have still hit $23.7 billion in 2014, a 60% leap from 2013 and slightly higher than the market’s five-year average,
(which includes mega-deals). The number of deals was about 30% higher than its historical five-year average.
As in recent years, growth and buyout deals drove the most activity throughout the region, with secondary deals—
those between PE funds—accounting for about 20% of buyout value in 2014. GPs also renewed their focus on
start-up and early-stage deals and the Internet sector drew the most interest overall. As we will discuss more fully
in Section 3, GPs are paying much closer attention to ownership structure and governance, looking for creative
ways to manage their risk by building path-to-control provisions into acquisition agreements.
Fund-raising: A clear flight to quality
After two consecutive years of declines, the Asia-Pacific region gained share in global fund-raising in 2014, as
capital raised from LPs increased 11%, to $43 billion, while the global total fell 7%, to $375 billion (excluding real
estate and infrastructure) (see Figure 2.5). As we’ve noted, that’s a clear testament to how much PE depends on
recycling capital to thrive. What’s equally clear, however, is that LPs have become significantly more discerning
about which funds get their capital. Having been disappointed during the last boom cycle, LPs are taking a much
harder look at performance history and fund strategy this time around. The number of GPs closing funds in the
region has declined steadily each year since 2011, and 2014 was no exception. But the total value of funds raised
increased, because the average fund size jumped 51%, to $404 million. That reflects a growing preference among
LPs to place larger amounts of capital with fewer proven winners.
Large buyout funds attracted the most new capital in 2014, and regional funds that offer LPs the protection of
more diversification across the Asia-Pacific economies drew particular favor. Regional funds raised 33% more
Figure 2.5: Asia-Pacific funds, especially regional funds, increased their share of global fund-raising
Fund-raising eased off globally, but grew for Asia-Pacific funds
Global PE closed funds
(by final size and year of final close)
CAGR
(13–14)
403
$400B
300
There was a clear shift from country-focused to regional funds
375
-7%
100%
$55B
$43B
$39B
$43B
80
299
259
257
-16%
219
200
60
40
100
0
Asia-Pacific–focused PE capital raised
(by year of final close)
12%
11%
2009
Percentage
8%
for Asia-Pacific
10
11
12
13
14
17%
21%
14%
10%
12%
No AsiaPacific focus
Global with
Asia-Pacific focus
20
0
2011
Percentage for 13%
pan-Asia-Pacific
Asia-Pacific
focused
Other
Note: Real estate and infrastructure funds are excluded in both graphs
Source: Preqin
Page 7
12
13
14
28%
44%
52%
India
G.China
Pan-AP
Asia-Pacific Private Equity Report 2015 | Bain & Company, Inc.
capital in 2014 than they did a year earlier and took home more than 50% of the total capital raised regionwide.
Country-specific funds, meanwhile, raised 5% less capital.
About 250 funds were on the road looking for funds in 2014, but a decreasing percentage met their goals. Almost
half of those seeking fresh capital in 2014 failed to reach their targets, and 40% are taking as long as two years to
achieve final close. Experienced funds with more than $1 billion in assets under management continued to increase
their share of total capital raised in the market, commanding 42% in 2014, about 20 percentage points more
than in 2012 (see Figure 2.6).
As we’ve said for several years, this bifurcation in fund-raising will have a beneficial effect on the market over time.
The ongoing shakeout of the market’s worst performers should lead to healthier overall market performance.
But by nature, PE funds can hold on for a long time, and the transition inevitably will be slow.
Figure 2.6: A flight to quality among investors is benefiting funds with size, experience and a
proven track record
Only 20% of the funds on the road reached their goal in 2014
More money flowed into larger funds and more experienced GPs
Percentage of Asia-Pacific–focused PE funds closed
Amount raised by Asia-Pacific–focused funds
(by fund's size and level of GP's experience)
100%
100%
80
80
60
60
40
40
20
20
0
2011
Met or surpassed
target in less
than 1 year
12
13
Year of final close
Met or
surpassed target
in 1–2 years
0
14
Failed to meet
target within
2 years
Number of Asia-Pacific–
focused funds closed
300
200
100
2011
Large
experienced
funds
12
13
Year of final close
Smaller
experienced
funds
14
First-time
funds
Notes: Real estate and infrastructure funds are excluded in both graphs; large experienced funds exclude first-time funds and include funds with more than $1 billion in assets
Source: Preqin
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Asia-Pacific Private Equity Report 2015 | Bain & Company, Inc.
3. Outlook: What will it take to sustain momentum?
Given the roller-coaster ride the Asia-Pacific PE industry has experienced over the past several years, it is fair to ask
whether 2014’s performance was anomalous or something more sustainable. Without a doubt, the Asia-Pacific
growth story remains compelling even if the short-term outlook presents some macroeconomic and market-specific
concerns. Amid slowdowns in China, Japan and Southeast Asia, the region’s overall growth in real GDP softened
to 3.8% in 2014 from 4.3% a year earlier. But the Economist Intelligence Unit is projecting an increase to 4.4% in
2015, and few would dispute that the region’s long-term potential is intact. The Asia-Pacific region’s diverse set of
economies stretching from China to Myanmar still outperforms the global average, powered by rapid development
and modernization. Middle-class populations are exploding, and government policy is improving. Inflation and
government debt are largely under control.
What’s been most crucial for the PE industry over the past several years, however, is that the region’s short-term
slowdown in growth has reined in inflated expectations that led to a frenzy of sometimes unprofitable activity.
LPs and GPs alike have recalibrated during the downturn and are approaching investment with significantly more
discipline. Based on the evidence at hand, we’re encouraged that certain structural imbalances that have plagued
the post-boom industry are easing and that a more mature industry is emerging. But we also recognize that several
things must happen for the momentum to continue.
What we feel good about right now
We’ve already mentioned several of the most encouraging signs to emerge from the industry in 2014: LPs were
cash positive in the Asia-Pacific region for the first time ever; strong exits should help GPs distribute more
capital; and returns are on the rise, especially for top-tier funds. But there were a number of other important
indications that PE in the region is transitioning from a market fueled by hopes and speculation to one rooted
in strong, sustainable performance.
Healthier portfolios. One of the major issues GPs have faced in the wake of the pre-2008 boom period is that they
bought too many companies at peak valuations with minority stakes, making it difficult to improve investment
outcomes when performance soured. As economic growth slowed in the years following the boom, exiting these
investments at acceptable returns became a challenge. As a result, GPs have tended to hold on to them, contributing
significantly to the market’s large and growing exit overhang. Overall, unrealized value in Asia-Pacific portfolios
grew 30% annually from 2009 to 2013, ultimately reaching $242 billion.
But the situation is improving steadily. As exit activity picked up in 2014, growth in unrealized value slowed to
1%. That’s because many GPs were able to pare away at their exposure to the oldest transactions. Looking at
buyout deals alone, investments bought from 2005 to 2008 made up 23% of the total value from unrealized
and partly realized investments in mid-2014, down from 33% the year before and far below the 44% global figure
(see Figure 3.1). Additionally, the median holding period of Asia-Pacific investments declined to 4.7 years,
the first such decrease since 2007.
A push for more control. As GPs whittle down their exposure to older, less attractive deals, they also are taking
important steps to secure meaningful ways to add value to their portfolio companies in the future. Minority-stake
deals are still most prevalent in the Asia-Pacific region (up to 90% of deal count in some markets). But in our
survey, about 60% of the Asia-Pacific GPs and almost 70% of the funds focusing on Southeast Asia, South Korea
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Asia-Pacific Private Equity Report 2015 | Bain & Company, Inc.
Figure 3.1: Strong exit activity slowed the growth of unrealized value and helped scrub portfolios of old deals
For the first time since 2008, exit overhang was flat
Firms are reducing boom-year inventory
Unrealized and partly realized capital (by investment year, buyouts only)
Asia-Pacific PE unrealized value
$300B
100%
1%
242
30%
CAGR
200
2013
244
80
60
40
86
2009
2008
66
20
39
0
0
2011
2010
131
65
2012
196
151
100
2014
2007
2006
2005
2013
2006
07
08
09
10
11
12
As of year-end
13
2014
14
2014
As of mid-year
Pre-2008
percentage
Note: Real estate and infrastructure deals are excluded in both graphs
Source: Preqin
33%
23%
Asia-Pacific
44%
Global
and Greater China said they are seeking path-to-control mechanisms in these transactions so they can participate
more fully in value-creation strategies and decision making (see Figure 3.2). The most popular provisions
include board seats and veto authority over key decisions involving people, capital spending and M&A activity.
GPs estimate that over the past two to three years, a healthy 30% of the minority deals they’ve entered had paths
to control. And they believe the opportunity exists to boost that number closer to 40% over the next few years.
Fewer, but stronger, GPs. As we’ve said, the shakeout in the Asia-Pacific PE market has been under way for several
years, and that means fewer underperforming funds are on the market, either seeking new capital or competing
for a finite pool of deals. In 2011, money-losing funds made up almost half of the total fund value on the market.
In 2014, that number dropped to 15%. Over the same period, top-performing funds—those earning better than
16% on average—have moved to 21% of total value, from 11%. And as the stronger funds get even stronger,
they attract the most new capital, perpetuating a virtuous cycle that is creating a more healthy, dynamic pool of
funds overall (see Figure 3.3).
Our optimism in this area, however, stems more from the trend than the immediate impact. There are still more
than a thousand PE firms operating in the Asia-Pacific market, and many are struggling. The long-term nature
of the business means it can take years for troubled funds to unwind and exit the market completely. It’s also
important to note that remaining among the top performers is becoming increasingly difficult. Historically in the
PE industry, past performance has been a reasonably reliable indicator of future returns for LPs figuring out where
to put their money. But as we observe in our Global Private Equity Report 2015, that’s less true than it used to be.
It is becoming harder for GPs to produce market-beating returns year after year. The shakeout of poor performers
is real, and we’re confident that is building a firmer foundation for future industry growth. But we’re equally
certain that future performance by individual funds will require a higher level of execution across every link in
the investment value chain.
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Asia-Pacific Private Equity Report 2015 | Bain & Company, Inc.
Figure 3.2: GPs are on the hunt for deals that include a path to more control over performance
Most GPs want more control over minority deals
And they're looking for deals that offer more control
Percentage of GPs' interest in gaining
"path to control" provisions
Percentage of deals bought with a minority stake and
"path to control" provisions (as of Jan 2015)
100%
50%
Not relevant
Not
interested
at all
80
Not really
interested
60
7 percentage points
40
30
Moderately
interested
40
20
Very
interested
20
Most common
provisions used
include board
seat and veto
rights for key
people and
Capex decisions
10
0
0
In the past 2–3 years
Dec 2014
In the next 2–3 years
Source: Bain Asia-Pacific PE survey, January–February 2015 (n=145)
Figure 3.3: A shakeout of the weakest Asia-Pacific funds continued in 2014
The quality of the players on the field has improved
Investors are rewarding those that have demonstrated success
Active Asia-Pacific–focused funds
(by IRR and value of fund)
Asia-Pacific–focused funds closed during the year
(by fund's value, based on prior fund's quartile)
100%
100%
Q1
80
80
60
60
40
Q3
40
20
0
Q2
20
2009
10
11
12
13
0
14 H1
As of year-end
IRR >16%
11–16%
0–10%
Q4
2008
09
10
11
12
13
14
Close year
<0
Notes: For both graphs, real estate and infrastructure funds are excluded; for the left-hand graph, only funds that have IRR data are included; a fund is considered active when 80% or less capital
has been called and the fund’s status is not liquidated; for the right-hand graph, funds with a prior fund are included and quartile is based on Asia-Pacific funds with the same vintage year
Sources: Preqin; Bain analysis
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Asia-Pacific Private Equity Report 2015 | Bain & Company, Inc.
More opportunity. Despite many years of strong activity, PE is still significantly underpenetrated in the Asia-Pacific
region relative to the rest of the world. Private companies that could benefit from PE investment are plentiful—
especially in markets where other sources of capital are scarce. But in the past, many company owners have been
reluctant to trust outsiders with an equity stake. Now that is changing. In recent years, owners throughout the
region have become more and more comfortable with taking on PE firms as trusted partners, opening more
opportunities for GPs to gain access to proprietary deals or negotiate greater control over decision making. As
the industry matures, the number of PE-backed assets is also increasing, which creates more opportunities for
already popular secondary deals—those where PE firms are both the buyer and the seller.
Strong investor commitment. Given the Asia-Pacific region’s volatility in recent years, LPs have remained remarkably
committed. The region’s growth profile is a magnet for investors looking for emerging market diversification, and
PE offers a lucrative way to capitalize. Even as returns slumped in the Asia-Pacific region following the global
economic crisis, the PE asset class still outperformed many other investment options. Buyout investments have
returned more than public markets in the Asia-Pacific region over both short- and long-term horizons. Globally,
LPs have become under-allocated in the PE asset class (based on their stated targets), and in the 2015 Preqin
Global Private Equity and Venture Capital Report, 84% said they plan to increase or maintain their investment.
More also plan to devote a larger share of their PE allocation to emerging markets. In 2014, 35% of the LPs surveyed
by EMPEA said emerging market funds made up 16% or more of their total PE allocation. But 47% said they
wanted to push above 16% by 2016.
Bullishness on the ground. The GPs in our survey unanimously said they expect at least a slight increase in deal
activity in 2015. That’s probably not surprising given the record $132 billion in dry powder sitting in Asia-Pacific
portfolios (see Figure 3.4). A full 83% of GPs said that making new investments would be the firm’s first or
Figure 3.4: Record levels of dry powder in the market will continue to motivate PE firms to find deals
Asia-Pacific–focused dry powder
$150B
100
87
129
132
117
119
10
11
12
13
14
1.8
2.2
2.2
2.3
2.3
90
85
65
50
50
36
17
21
0
2003
04
05
06
07
08
09
As of year-end
Years of future
investments
(estimated)
0.4
0.5
0.8
1.1
1.5
Buyout
2.0
Growth
1.7
Other
Note: Other includes venture, distressed and mezzanine funds, and excludes real estate and infrastructure funds
Source: Preqin
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Asia-Pacific Private Equity Report 2015 | Bain & Company, Inc.
second priority in 2015 (see Figure 3.5). That means that even if competition and rising asset prices provide
headwinds, GPs will be pushing harder than ever to find ways to make more deals happen.
Areas of concern
While each of these factors bodes well for the future, several areas of concern remain. The Asia-Pacific PE industry
is still working through a multiyear transition toward more reliable performance. If LPs are to maintain their
enthusiasm for the PE asset class, they will need to see a steady flow of healthy capital distributions and evidence
that improving returns on investment are sustainable. For that to happen, GPs will have to push harder to put
more money to work and extract more value from their portfolios. Here’s what we’re looking for:
A renewed push for performance. Although average returns have improved substantially from their nadir in
2009, the gap between the best and the worst funds also has narrowed (see Figure 3.6). On the one hand,
this is encouraging evidence that the worst performers are dropping out of the market as LPs shift new capital
to the best performers. But it also suggests that making money at the top end has become significantly more
challenging as the industry matures and becomes more competitive.
Before the global financial crisis, GPs in the Asia-Pacific region could count on buying companies at reasonable
prices and watching their multiples expand alongside rapid GDP growth. “Quick flips” of three years or shorter
were common, helping produce world-beating returns that attracted floods of new capital. But those easy-money
days are over. GDP growth in large, maturing markets like China has slowed and in a world of superabundant
capital, it has become increasingly difficult for even the best GPs to string together year after year of superior results.
That is as true in North America or in Europe as it is in the maturing markets of the Asia-Pacific region.
Figure 3.5: GPs are committed to maintaining deal-making momentum in 2015
GPs are eager to put more money to work in 2015
And they are unanimous in expecting investment activity to increase
Importance of making new investments in the
Asia-Pacific region in overall firm priorities
GPs' expectations for a change in Asia-Pacific
PE investment activity in 2015
100%
100%
83%
80
60
80
72%
Top 2
priority
60
40
20
40
Top 1
priority
Key reasons for
optimism include
1. Macroeconomic
conditions (43%)
2. Easier exit
environment (41%)
Moderate
increase
(10–25%)
3. Greater seller’s
acceptance of
PE funds (41%)
20
0
Rank
Slight
increase
(0–10%)
Significant increase (>25%)
0
2014
Expectations for 2015
No. 1
No. 1
Expectations for 2015
Source: Bain Asia-Pacific PE survey, January–February 2015 (n=145)
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Asia-Pacific Private Equity Report 2015 | Bain & Company, Inc.
Figure 3.6: Funds are increasingly clustered in a narrower band of returns as it becomes harder to
outperform the average
Distribution of Asia-Pacific–focused funds IRR (percentage of funds in sample)
Median=9.4%
50%
Median=14.4%
40
30
20
10
0
-40
-30
-20
-10
0
10
20
30
40
50
60
70
80
90
100%
Net IRR
Vintages before 2005
Vintages 2005–2011
Notes: Real estate and infrastructure funds are excluded; funds are included where IRR data is available (n=310)
Source: Preqin, based on latest performance data available (mostly June 2014 or September 2014)
Lots of money in many hands has a democratizing effect. It tends to level out performance across a given market.
Crowds of potential buyers make it considerably harder for top firms to ferret out proprietary deals at cheap prices.
Instead, auctions drive up asset values, which forces GPs to hold companies longer and work harder to create value
via cost-cutting, new product strategies, M&A or other mechanisms. Price multiples have been growing in the
Asia-Pacific region, and although the market’s median holding period for assets declined to 4.7 years in 2014, that’s
still significantly higher than in earlier years. The absence of quick flips makes it harder for GPs to meet investor
expectations (see Figure 3.7). The combination of all these factors acts as ballast for even the best-run portfolios.
Most of the Asia-Pacific GPs we surveyed don’t anticipate a drop in asset prices, and few believe that the median
holding period will improve meaningfully in 2015. More than half of those experiencing moderate or significant
issues with older vintage companies said they would rather wait for a better time to exit than sell at a discount
or write off the investment.
As we’ve noted, returns from younger vintage funds show strong improvement, which is an important cause for
optimism about the sustainability of IRR growth. But it is also hard to draw too many conclusions. Returns from
younger vintages reflect largely unrealized gains, making it difficult to predict how returns will actually unfold in
the future. Unsold assets sitting in a fund portfolio can have dramatic impact on its performance over time. Our
analysis demonstrates that it is not until around year seven that the returns truly prove out (see Figure 3.8).
All of this points to a single important conclusion: GPs will have to work harder and more creatively if they are
to meet investor expectations in the future. They will clearly have to double down on efforts to work through the
glut of pre-2009 vintage investments weighing down their portfolios. But as we discuss more fully in Section 4
of this report, GPs will also have to step up to a new level of portfolio activism.
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Asia-Pacific Private Equity Report 2015 | Bain & Company, Inc.
Figure 3.7: Holding periods have improved, but it still takes time to create a profitable exit opportunity
Holding periods have started shortening
But “quick flips” are rare in the Asia-Pacific market
Median holding period for Asia-Pacific investments
(number of years, by exit year)
Count of Asia-Pacific exits (by length of time held
in portfolio and by exit year)
6
100%
5.1
4.3
4
3.4
3.4
2.8
2.8
80
4.7
4.6
60
3.7
2.9
40
2
20
0
0
2005
06
07
08
09
10
11
12
13
2005 06
14
07
08
11
09 10
Year of exit
<3 years
3–5 years
12
13
14
>5 years
Note: For both graphs, only growth and buyout funds are included, and real estate and infrastructure funds are excluded
Source: Preqin
Figure 3.8: A large volume of unrealized gains makes it difficult to forecast Asia-Pacific returns with certainty
There are plenty of unrealized gains still locked up,
especially from recent investments
Performance can shift dramatically
over a fund's life
Proportion of aggregate value of active and realized
PE-backed buyout deals in the Asia-Pacific region
IRR over the fund's life
(for funds with IRR >16% in Year 3)
100%
100%
80
80
Unrealized
60
>16%
60
Unrealized
11–16%
40
40
Realized
20
0–10%
20
Realized
0
2004–08
<0%
0
2009–14
3
Year of deal investment
4
Year
5
6
Notes: For left-hand graph, real estate and infrastructure deals are excluded; for right-hand graph, Year 1 is the vintage year plus 1; analysis includes 14 funds where IRR is known
for every year between Year 3 and Year 6, and includes funds that are missing only one data point
Source: Preqin
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Asia-Pacific Private Equity Report 2015 | Bain & Company, Inc.
Sustained exit momentum. Maintaining exit momentum will be one of the most important challenges in the
coming year. And success will depend heavily on the health of the volatile IPO channel. IPO deals—most notably
the $25 billion Alibaba blockbuster in China—were responsible for well over half of all Asia-Pacific exit value last
year. Continued momentum will likely hinge on the degree of equity market volatility, especially in Greater China,
Japan and Australia, which have accounted for 90% of the region’s IPO value and more than 80% of transaction
volume over the past five years. All three markets had strong exit volume in 2014, supported by high public
valuations and GPs eager to pare down large exit overhangs so they could attract new capital. GPs will be no less
enthusiastic in 2015. But, as always, predicting the direction of equity markets is tricky.
The good news on the exit front is that the outlook is strong for trade sales, which have accounted for about 40%
of the total exit value and almost half of the deal volume over the last five years. Corporate buyers with a surfeit of
cash have been active in the market for several years, looking to meet ambitious growth targets with acquisitions.
In markets where these strategic buyers have less-than-perfect visibility, they often view PE ownership as a stamp
of approval, assuming that GPs have worked hard to polish and de-risk their portfolio companies. Secondary sales—
or transactions between two PE funds—should also provide some opportunity. These marriages of convenience
slipped in number last year amid the surge in IPO and trade deals. But volume was on par with the average over
the past five years and should increase over time. GPs often find that secondary exits are quicker to arrange and
have a higher chance of completion than trade sales or IPOs. With PE funds feeling pressure to put capital to work
and return cash to their investors, these deals also can provide a compelling alternative to both parties.
Manageable competition and pricing. With the world awash in cheap capital and buyers of all types on the hunt
for investments, it is unlikely that global competition for deals will ease anytime soon. In the Asia-Pacific region,
where $132 billion of available dry powder is representing 2.3 years of future investment, there is still a lot of
money chasing a limited number of deals (see Figure 3.9). According to Bain’s Asia-Pacific survey, most GPs
Figure 3.9: Abundant capital in the Asia-Pacific region keeps the competitive heat high
The PE market is increasingly competitive
A superabundance of capital is fueling more competition
Perceived change in competition compared with
the past two years (percentage of respondents)
Number of years of unspent capital based on the estimated
value of future investments for Asia-Pacific–focused funds
100%
3
80
60
2
40
Biggest
threat in
2015?
2.2
11
12
2.3
2.3
1.7
1.8
09
10
13
14
1.5
20
0
2.2
2.0
1.1
2014 15
14 15
14 15
As of year beginning
14
1
15
Regional/
local GPs
Strategic/
corporates
Global
GPs
LPs/SWFs
Tied for
No. 1
Tied for
No. 1
No. 3
No. 4
Decrease
0.8
0
2005
No change
06
07
08
As of year-end
Increase
Notes: Infrastructure and real estate funds are excluded; adding global funds invested in the region would increase the totals
Sources: For right-hand graph, Preqin; Bain Asia-Pacific PE survey, January–February 2015 (n=145)
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Asia-Pacific Private Equity Report 2015 | Bain & Company, Inc.
believe competition will increase on all fronts in the coming year. But they are particularly wary of pressure from
regional and local GPs, as well as from cash-rich corporate buyers, all of which tend to show up as potential suitors for any attractive company. LPs hoping to enhance their returns may also inject more “shadow capital”
into an already saturated market, although only a small group of LPs currently have the capabilities to source and
execute standalone deals. According to our survey, GPs expect to see more co-investments.
Increasingly intense competition, of course, pushes asset prices higher, making it more difficult to find and justify
suitable investments. It doesn’t help that robust equity markets in various Asia-Pacific markets also have tended
to support higher multiples. If that fueled the surge in exit activity last year by lifting the IPO markets, it also
emboldened sellers to demand higher prices—a trend that, if it were to continue unabated, could dampen deal
making. All told, the average multiple of enterprise value to EBITDA for Asia-Pacific PE-backed transactions last
year was 15.3. This was up 21% from 2013 and was 59% higher than the 9.6 average multiple in the US market
registered for buyouts only, in the first half of 2014 (see Figure 3.10).
Not surprisingly, an increasing proportion of the GPs in our survey consider current valuations in the Asia-Pacific
market high to very high, and 72% of them expect prices to continue climbing to some degree in 2015. The ongoing
shakeout among GPs may help to ease pricing over time. But given the competitive pressures and superabundant
capital, valuations will remain under pressure. Record dry powder means GPs will be motivated to do deals even
if faced with higher multiples and stiff competition. The challenge will be to avoid past mistakes by seeking out
proprietary opportunities, securing path-to-control mechanisms and devising an exit strategy from day one.
Stable geopolitical and macroeconomic conditions. As we’ve seen time and again in the Asia-Pacific region and
other emerging markets, economic and political volatility can have outsized effects on investment activity. In
2014, for instance, activity in both India and Indonesia slowed in the months before key elections as investors
Figure 3.10: Heavy competition and pressure to invest keep valuations high in the Asia-Pacific region
Purchase multiples have increased
Most GPs expect prices to keep rising
Average EV/EBITDA multiple on Asia-Pacific
PE-backed M&A transactions
Perspective on Asia-Pacific PE valuations
100%
15.3 15.5
Very high
15.3
15X
13.1
12.8
13.8
13.4
12.2
Moderately
up
(10–25%)
80
12.6
High
60
9.8
10
Slightly up
(0–10%)
40
Fair
5
20
0
0
2005 06
07
08
09
10
11
12
13
Attractive
Jan 14
Jan 15
Current perspectives
on valuations
14
Moderately
down
(10–25%)
Slightly
down
(0–10%)
Expectations
for 2015
Notes: Equity contribution includes contributed equity and rollover equity; based on pro forma trailing EBITDA; for the Asia-Pacific region, based on PE-backed M&A transactions where
there is a transaction value; these M&A transactions exclude extremes multiples (<1 or >100)
Sources: For left-hand chart, S&P Capital IQ; Bain Asia-Pacific PE survey, January–February 2015 (n=145)
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Asia-Pacific Private Equity Report 2015 | Bain & Company, Inc.
waited to see who would win and how it would affect those markets. In the sidebar, “Diverse markets, diverse
outlooks,” we take a closer look at what to expect from each of the Asia-Pacific markets in the coming year. Perhaps
most worrisome is that the deceleration of China’s economy, which Bain anticipated several years ago, has moved
into full swing. Growth has followed a highly volatile but downward trend from roughly 10% at the beginning of
the decade to just 6.6% (annualized quarter vs. quarter) since the beginning of 2014. Given long-term population
and productivity trends, Bain expects the slowing to continue at a moderate pace through the end of the decade.
This will likely produce ripple effects throughout the region, especially in markets like Australia, which relies
heavily on exports to China.
Despite the turnaround in Asia-Pacific PE, these challenges underscore that it will be no easier to find deals, close
them and generate superior returns. LPs may have increased their allocations to the region this year, but they
continue to whittle down the list of firms they will back, favoring only those that can truly differentiate themselves
and demonstrate consistent performance. As we discuss in the final section of this report, GPs have the opportunity
to create their own future in the Asia-Pacific region by focusing hard on creating more value from their portfolios.
Those firms that can’t state precisely what they stand for and how they will outperform the averages are likely to
struggle against firms with a sharply differentiated strategy for consistently delivering value.
Diverse markets, diverse outlooks
Spanning from India to Japan and from China to Australia, the Asia-Pacific region is nothing if not
diverse. While 2014 was a spectacular year for the region overall, clear differences appeared
across geographies. Below is Bain’s perspective on what happened in each of these markets over
the past year, and on what to expect in 2015 and beyond.
Greater China: Breakout activity... but for how long?
• The Asia-Pacific region’s biggest market roared back to life in 2014 as deal value reached $41
billion, a full 33% higher than the market’s previous peak in 2011. While six mega-deals larger
than $1 billion accounted for most of the investment growth, GPs worked hard to put capital to
work, pushing the number of individual transactions to 350, 30% higher than the market’s five-year
average. Exit value also exploded behind Alibaba’s $25 billion IPO, surging to $61 billion, more
than triple 2013’s value. Both pre-IPO deals and exits benefited from strong equity markets and
got a major boost from the reopening of China’s IPO channel following its closure from late 2012
through 2013. On the buy side, Internet deals soared, contributing about 40% of the total volume,
compared with about 15% for the last five years. Technology and healthcare also did well. A
number of key developments indicate China’s market is undergoing an important transition. The
return to the market of sovereign wealth funds—most of them foreign—led to many of the market’s
largest deals. And a few local GPs with access to proprietary deal flow and patient state-backed
capital sources continued to be important players. Although growth deals still make up the bulk
of the market, GPs are increasingly able to negotiate path-to-control provisions, giving them more
control over outcomes. And the ongoing growth of buyout deals, where GPs own a majority stake,
is an increasingly important trend.
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Asia-Pacific Private Equity Report 2015 | Bain & Company, Inc.
• But how durable is China’s newfound momentum? As the economy matures and the government
seeks to rein in excesses, China’s economic growth continues to soften; the Economist Intelligence
Unit projects it will shrink from last year’s annual rate of 7.3% to 5.3% over the next five years,
and Bain’s Macro Trends Group expects this period to be volatile, with the economy alternately
heating and cooling as China attempts to rebalance from export- to consumer-led growth. While
our survey shows that GPs on the ground remain optimistic and are prioritizing new investments,
only 40% of them expect growth to exceed 10% in 2015, compared with 60% for Asia-Pacific
GPs generally. That said, the China PE market is well on its way to building a foundation for
steadier, more sustainable long-term growth. GPs report that sellers looking for help navigating
a less certain future have warmed significantly to the PE value proposition. That is creating more
opportunity under the umbrella of the mega-deals and is encouraging the path-to-control trend.
What’s clear, however, is that slower growth means success will increasingly depend on hard
work. GPs will have to find deals in resilient sectors or those that will benefit from important trends
like digital transformation. Healthcare, the consumer sector and business services will be prime
targets, as will the Internet sector, though firms will have to be wary of expanding bubbles. As
China’s economy transitions to a slower growth rate, GPs also will have to take a hard look at
whether the deal theses for companies in their portfolios continue to hold up. The strongest returns
will flow to those that take an activist approach, especially when it comes to shoring up talent
and building more professional organizations—often a challenge in China.
India: Growing optimism after a difficult year
• Politics largely defined the Indian market in 2014. Although business activity generally froze in
anticipation of the general elections in April and May, Narendra Modi’s victory raised hopes
that reforms will make doing business in India easier for both foreign and domestic firms. Overall,
PE activity held up well. As in China, a few big deals led by SWFs boosted investment value to
$11.4 billion, nearly 10% better than 2013 and well above the $7.6 billion five-year average.
The Internet sector sparked much of the growth, contributing almost 20% of the deal count, but
activity touched on a broad range of sectors. More important, GPs are also finding an increasing
number of path-to-control deals, improving their ability to create value at their portfolio companies.
On the sell side, an absence of big exits—none more than $400 million—kept totals low despite
a record high number of smaller transactions. While 85% of the Indian GPs in our survey said
they face moderate to significant challenges with their unexited investments from pre-2008
vintages, the majority indicated they are unwilling to exit at a discount. They prefer to wait for
a more opportune window while working harder to extract more value. Many postponed deals
in advance of the general elections, for instance, deciding to wait for greater clarity.
• Following a year of general uncertainty, however, the outlook has brightened considerably in
India. The market is hopeful that better economic stewardship by the Modi regime will unlock
sustainable economic growth. Inflation has moderated (aided by falling oil prices), the rupee has
strengthened and the stock market is buoyant. Greater optimism and strong equity markets should
encourage more exits, helping GPs clear out their troublesome pre-2008 deals and return more
capital to investors. This process will take time and may require some sacrifice on returns. But it is
essential to recharging interest among LPs. GPs on the ground unanimously expect new investment
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Asia-Pacific Private Equity Report 2015 | Bain & Company, Inc.
activity to improve in 2015, with 80% of them predicting growth topping 10%. E-commerce
will continue to be a magnet, while secondary deals, which have been an important source of
investments over the last three years, may provide further opportunities. Given high valuations,
which are rising along with the equity markets, it will be critical that GPs continue to lock in more
minority deals with path-to-control provisions.
Southeast Asia: Still waiting for a breakthrough
• For the last several years, PE investors looking to diversify their exposure to the much larger markets
of China and India have piled into Southeast Asia, hoping that the fast-growing sub-region would
catch fire. For a variety of reasons—heavy competition, too few targets, macroeconomic and
political issues—they are still waiting. Performance varied market by market in 2014, but overall
activity and value were about average. Singapore led activity, producing two mega-deals totaling
$2.3 billion, helping push Southeast Asia’s overall investment value to $5.9 billion, slightly better
than 2013, but still 7% below the five-year average. Smaller markets like the Philippines and
Thailand contributed robust growth despite rich valuations in the Philippines and a military coup
in Thailand. Malaysia grew 19% compared with 2013 but was still 38% lower than its five-year
average amid political and macro concerns. The biggest disappointment was Indonesia, where
investment value slid for the fourth year in a row, to $298 million, as investors fretted over high
prices and waited for the outcome of midyear elections. As for exits, GPs throughout the region
worked hard to produce transactions, but they were often not comfortable with the price they could
get, causing delays. They actually closed as many exit transactions as in the past, but almost half
of them were valued at less than $50 million, and total value slid to $4.4 billion, the worst showing
since 2006. The equity markets were flat in Singapore and Malaysia, crimping two traditionally
strong channels for IPO exits. Trade sales also were timid, reflecting the sub-region’s decline in
M&A activity, which was particularly pronounced in Indonesia, the Philippines and Thailand.
• Despite all this, investors still view Southeast Asia as an Asia-Pacific gem. GPs in our survey expect
the sub-region to top China as the most attractive market for new deals in 2015. Few expect any
relief on competition or asset prices. But many see a breakthrough in how company owners
view PE. One-third of GPs—compared with 5% a year ago—said they believe local companies
have a good understanding of the PE value proposition, which could mean the pool of potential
targets is deepening. It’s easy to forget that most funds are still getting established in Southeast
Asia and are only now building the kinds of local networks that are essential to finding targets
in these rapidly developing economies. In the wake of the Indonesian elections, the new regime is
sending positive signals to the business community, and macro trends more broadly are favorable:
Improving GDP growth in many of the Southeast Asian economies should provide further certainty
to PE funds on the ground. In addition, we’re seeing anecdotal evidence of an increasing number
of carve-out opportunities as large companies seek to shed Southeast Asian units.
South Korea: Another great year
• Though China stole the spotlight in 2014, South Korea’s sustained momentum shouldn’t be
overlooked. Two mega-buyouts—Hahn & Company’s $2.5 billion buyout of Halla Visteon Climate
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Asia-Pacific Private Equity Report 2015 | Bain & Company, Inc.
Control and the Carlyle Group’s $1.9 billion purchase of ADT Korea—pushed investment value
past $10 billion for the first time, culminating an impressive four-year surge. The overall growth
owed to strong, diversified deal flow, including distressed deals, cash-outs, noncore carve-outs
and secondary offerings. Exits, both in terms of value and deal count, also reached all-time record
highs. The $5.8 billion Oriental Brewery trade sale was a major contributor, adding almost 70%
to the total value, but underlying activity was healthy and higher than the historical average.
Bullish M&A activity led to a surge in trade sales, as corporate buyers continued to seek assets
improved through PE ownership.
• The biggest threat to South Korea’s momentum is South Korea’s momentum. It encourages the
kind of overcrowding that makes finding deals increasingly challenging for GPs. Several global
firms are adding talent to focus on the market and many regional and local GPs are growing in
scale. Increased attention inevitably leads to more competition for deals and rising asset prices.
Three-quarters of the Korean GPs in our survey—twice the number as a year ago—see valuations
in the market as high or very high. Still, GPs are unanimously confident about future deal activity,
with more than 60% expecting that growth could top 10%. An increasingly favorable lending
market will help spur activity, and in the short term, GPs will see a steady flow of high-leverage
distressed-asset deals. Longer term, they are counting on noncore carve-outs from conglomerates
and more growth deals. And they see ample opportunities among midcap company owners who
increasingly view PE investment as an attractive way to generate retirement income or new expansion
capital. With competition increasing and multiples rising, however, robust value-creation strategies
will be critical to generating sustained returns and attracting new capital.
Japan: Improving economic conditions for a mature PE market
• Japan had a mixed year on the PE front: While deal value trended below its historic average of
$6 billion to $8 billion, exit value soared. The year started amid uncertainty around the impact
of a value-added tax increase in April. And though some improvement in the economic outlook
helped in a few ways, it hurt in others. Fiscal stimulus as part of Abenomics—the “reflationary”
policies of Prime Minister Shinzo Abe—has boosted the equity markets and is helping reduce pressure
on weaker companies. While that took away some distressed deals and management buyout
opportunities in 2014, strong public valuations produced an all-time high of $18 billion in exit
value. A few large exits contributed the most value, but activity was strong and got a boost from
looming investment horizons. Our survey shows that 80% of GPs in Japan are facing challenges
with pre-2008 unexited portfolio companies, compared with 54% for the Asia-Pacific region overall.
• While ongoing strength in the equity markets could help clear out the remaining backlog of older
underperformers, it may continue to hinder distressed deals and management buyouts. But GPs
in our survey are counting on other opportunities to feed investment flow. They unanimously expect
deal activity to improve, with almost 60% claiming growth could be as high as 10% to 25% in 2015.
Making new acquisitions will remain their No. 1 priority, and on balance, they believe sellers are
warming to the PE value proposition. GPs see opportunity to do more secondary transactions and
the occasional growth deal. And they are hopeful that several actions by the Financial Services
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Asia-Pacific Private Equity Report 2015 | Bain & Company, Inc.
Agency (FSA) will lead to an increase in corporate divestitures, increasing carve-out opportunities.
Getting those deals done will hence require convincing corporate sellers that a fund is the preferred
buyer, typically requiring a strong track record and differentiated value proposition. High public
multiples also will set a high valuation benchmark, requiring funds to price in some upside. That,
in turn, will require strong focus on extracting more value during the ownership period.
Australia: Strong exits, subdued buyout activity
• In many ways, activity in Australia mirrored that in Japan. Total investment value and activity
topped 2013 levels but were about even with the five-year averages. While growth deals—many
backed by venture funds—surged, buyouts slumped. The decline in buyouts owed in part to funds
focusing less on deal making and more on clearing exit backlog so they could secure new capital.
Strong public valuations also crimped management buyouts. Exits, on the other hand, set all-time
records in value and volume. Exit value soared to $14 billion, more than twice the five-year
average. Although a couple of mega-sized deals set the pace, exit activity overall was very
robust, as IPOs and secondary exits flourished.
• Economic uncertainty continues to cloud Australia’s outlook. The Economist Intelligence Unit
forecasts that GDP growth will decline slightly, to 2.8%, in 2015, partly in response to the ongoing
slowdown in China, Australia’s biggest trading partner, and Bain’s Macro Trends Group has
concerns about the possibility of a deeper, more protracted slowdown. The growing uncertainty
has dialed up pressure on policy makers to diversify Australia’s economy away from a reliance
on mining and resource development to spur growth—hardly an overnight prospect. That said, GPs
on the ground remain optimistic. Exiting assets will no longer be their highest priority; the search
for deals will replace it. And because more GPs were able to secure new funds after realizing
exits in 2014, they will have a ready pool of capital to look for more growth opportunities and
as many buyouts as they can find.
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Asia-Pacific Private Equity Report 2015 | Bain & Company, Inc.
4. Taking a more active role in winning
As kind as 2014 was to many Asia-Pacific PE firms, it’s also clear that the table stakes in the region continue to rise.
Slower economic growth, stiffer competition and higher multiples will only make it harder to generate marketbeating returns in the future. And as LPs narrow their bets to fewer firms at the top end, underperformers will
be starved for new capital, making it increasingly difficult to stay in the game.
Before the global financial crises, when investment capital was flooding into the Asia-Pacific region almost
indiscriminately, success was sometimes a simple matter of putting as much money to work as possible. The rapidly
rising economic tide tended to lift all boats, and PE firms could ride steadily expanding multiples to extraordinary
returns. But those days are long gone. While GDP growth and interest rate dynamics still have a powerful effect
on multiples, GPs today understand that they can no longer count on economic forces alone to boost the value
of their portfolio companies. Winning requires elevating their performance across every link of the investment
value chain, which often means going back to the basics: creating a differentiated strategy for generating sustainable
performance and taking an active role in molding portfolio companies into winners.
The power of portfolio activism
If the downturn taught the industry anything, it is that lasting value comes from active engagement with portfolio
companies. An activist approach is just one part of a value chain that also includes proactive deal sourcing,
effective due diligence and a well-planned exit strategy. But it is a critical one, especially in the Asia-Pacific region,
where so many deals have historically involved minority stakes. In many cases, Asia-Pacific GPs have had their
hands tied when it came to affecting decision making, operations and investment. That has forced them to
write off some investments and hold onto others for longer than they’d hoped, resulting in downward pressure
on investment returns.
Part of the problem is that the game has changed. Before the global financial crisis, GDP growth, multiple
expansion and leverage (when it was used) had the biggest impact on returns. Today, it’s mostly about profit
growth, survey respondents said. With valuations already elevated, buying low and selling high is no longer the
go-to deal thesis. And in most countries, where interest rates have nowhere to go but up, it is more difficult to count
on leverage to magnify returns. Growth across this diverse set of economies is still robust, but it is moderating
as markets mature, limiting top-line potential. Cost savings help improve results when revenues are slow, but
those opportunities are often baked into the prices paid for assets.
With all these forces in play, the highest-performing GPs are rolling up their sleeves and getting directly involved
in their portfolio companies. They are making full use of operational changes, talent selection, M&A and capital
efficiency to increase bottom-line performance. A “good buy” is still a prerequisite for any successful deal. But
generating market-beating returns increasingly means turning good buys into great ones and, occasionally,
finding ways to salvage mistakes.
That’s why path-to-control mechanisms can become a real asset for many GPs in the Asia-Pacific region. Growth
deals with minority stakes still dominate in many of these markets. But, as sellers warm up to the PE value proposition,
they are more and more open to giving GPs the board seats and decision rights that firms can use to influence
a company’s direction and meaningfully contribute to value creation. We view the expansion of these provisions
as a crucial market development. But it is also important to note that paths to control are no panacea. What ultimately
determines value is how well GPs make use of them to improve the performance of portfolio companies.
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Asia-Pacific Private Equity Report 2015 | Bain & Company, Inc.
Most GPs in the region are mobilizing to develop the internal talent and capabilities needed to support portfolio
activism. Our survey indicates that the median fund in the Asia-Pacific region currently has two to three fulltime employees devoted to value creation, a number that should almost double over the next three to five years
(see Figure 4.1). Almost 90% of firms say that, within the first six months of ownership, they develop a robust
value-creation plan for at least half of their portfolio companies. Around 75% are doing deep dives with company
management to identify potential sources of value and devise means to extract it.
Most often, the problem is execution. Only 18% of those GPs in our survey report that their value-creation plans
deliver the intended results. Few firms systematically engage with each company in their portfolio, and still fewer
do it consistently well. This isn’t just an Asia-Pacific problem. A Bain survey conducted through the Private Equity
Operating Partner Executive Network (PE OPEN), a global network of more than 400 partners responsible for
portfolio company oversight, found that while more than half of the respondents reported that their firms have
a clearly defined operating model to create value in their portfolio, fewer than 5% apply the model consistently
with each portfolio company they own and with the depth and quality intended.
This isn’t particularly surprising. It is always hard for PE firms and company management teams to pivot cleanly
from the intensity of the deal-making process to the heavy lifting of improving performance. Complacency, a
reluctance to raise difficult issues and confusion over roles all can deter quick action. Many GPs in the Asia-Pacific
region are also in the early stages of building out teams on the ground, making it difficult to achieve higher levels of
execution. The ultracompetitive nature of these markets—and the record overhang of unrealized capital from the
boom years—means firms are under intense pressure to find deals, put money to work, craft exit strategies and pay
back impatient investors. Often there is simply not enough time or bandwidth to accomplish all that needs to get done.
Figure 4.1: More funds plan to focus on value creation but need to execute more consistently
GPs plan to add talent focused exclusively on value creation
But lack of execution is a pressing issue for many
Full-time-equivalent employees focusing exclusively on a
portfolio company's value creation
Perspectives of Asia-Pacific GPs on their current
value-creation performance
100%
100%
Very rarely done (0-5%)
5–25% of portfolio
companies
>10 people
80
80
25–50% of
portfolio
companies
5–10 people
60
60
3–5 people
40
50–80% of
portfolio
companies
40
2–3 people
20
0
20
~1 person
<1 full-time
person
Current
0
In 3–5 years
Source: Bain Asia-Pacific PE survey, January–February 2015 (n=145)
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>80% of
portfolio companies
Robust value-creation
plan within 6 months
Value-creation plans
implemented successfully
with intended results
Asia-Pacific Private Equity Report 2015 | Bain & Company, Inc.
Firms are taking different approaches to solving the problem. KKR in the Asia-Pacific region, for instance, is hiring
a number of ex-consultants to build in-house teams that can consult with company management, supported by many
junior analysts and a few senior people. Alternatively, the Carlyle Group and Olympus Capital have assembled groups
of former senior executives of blue-chip companies, who can provide invaluable advice to portfolio CEOs. In between,
Temasek, GIC and Barings have built teams of people with a combination of consulting and industry experience.
There is no right answer for how to structure a team devoted to portfolio activism. In Bain’s experience, however,
all effective activist value-creation programs feature five critical building blocks. None is sufficient on its own, but
we find that the firms that deploy these building blocks early and throughout the asset’s hold period generate more
value and are more likely to produce consistent, market-beating returns.
1. Harvest low-hanging fruit quickly. Every deal presents opportunities for quick fixes. Tweaking pricing or boosting
salesforce effectiveness can increase revenues right away. Smarter procurement, better inventory management or
asset rationalization can cut costs and improve margins. Very often, effective due diligence identifies opportunities
like these, and it is important to engage with management to take advantage of them quickly. Even if some of this
upside was already reflected in the purchase price, aggressive action can take some of the risk out of the investment
in year one, while building early momentum and credibility with management. The mistake many managers make
is celebrating early. It’s easy to believe that these quick measures alone constitute a value-creation plan. To fight
off this sort of complacency, firms need to emphasize that this initial cleanup phase is only the beginning of a
longer-term effort to improve performance.
2. Design a robust value-creation plan in year one. An essential parallel step is to devise a longer-term strategy
that can guide value-creation efforts. The best activist firms recognize that time is of the essence and step in
immediately to help management assess the company’s full potential and then develop an aggressive plan to
get there. When launched early and formulated jointly with the portfolio company’s management team, a strong
value-creation blueprint can have a huge impact on deal success. A study of 128 deals where Bain worked with
management post-acquisition showed that rolling out such a plan in the first year of ownership produced a multiple
of 3.6 times invested capital—twice the industry average. We believe the reason these plans are so effective is that
they focus efforts on the right priorities, assign proper resources and secure strong alignment between the PE
fund and company management around specific, tangible goals. The best of them start with a clear view of where
the business stands today and a bold vision of its long-term potential. They then take a long wish list of initiatives
and whittle them down to the three to five that have the best chance of moving the needle within the firm’s preferred
five-year investment time horizon.
3. Execute on what matters most. The best value-creation plans, of course, are only as good as their execution.
And to some degree, execution depends on how much control a PE firm has over key decisions and strategic
moves. To the fullest extent possible, the best portfolio activists translate the three to five key initiatives laid out
in the value-creation plan into a clear, actionable roadmap for reaching a specified level of equity value. The plan
often sets up a program management office to oversee execution and defines the key metrics used to both track
performance against the plan and to provide early warnings about what’s not working. It is crucial, however,
that the PE firm and management revisit and refresh their value-creation strategy at regular intervals and adjust
appropriately to account for changing competitive or market dynamics. It can’t be a static document. When it’s
time to exit, the firm can use the value-creation plan to build the economic case for the asset’s sale and to identify
future growth opportunities for the next owner.
4. Deepen the talent pool and build a high-performance organization. Many GPs will tell you that grooming a
portfolio company’s management team—or putting in a new one—may be the most important factor in any deal’s
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Asia-Pacific Private Equity Report 2015 | Bain & Company, Inc.
success. In a recent survey by accounting firm Grant Thornton, PE executives ranked management team ahead
of strategy, operational improvements or macroeconomic factors as the most important element influencing their
portfolio companies’ results. Yet Bain has found that 85% of the companies in a typical fund have organizational
issues that significantly inhibit success. About half the time, according to our latest research, PE firms are forced
to change a company’s CEO over the period of ownership. In three-fifths of those cases, the ouster was unplanned.
This kind of management turmoil can disrupt even the best-laid value-creation plans. So it is essential to put the
right team in place as quickly as possible and then give it full support with strong incentives to succeed. The
best-performing PE firms undertake an early and clear evaluation of the CEO and the top team. They translate
the value-creation plan into “big jobs” and make sure to fill them with “big people.” They then align the rest of
the organization to the value-creation plan and identify ways to overcome key execution risks. This process inevitably
identifies talent gaps, which must be filled quickly. And since talent placement is an imperfect science, experienced
firms are constantly anticipating the need for change. When problems arise—from the CEO on down—they are
prepared to take swift and decisive action by drawing from a stable of seasoned senior executives who can be
parachuted in to fill key management roles.
5. Overinvest in good deals to convert them into great ones. Top performers in the Asia-Pacific region and elsewhere
around the world share a key trait: They are reluctant to throw good money after bad. All firms make mistakes in
picking companies and have to contend with deals gone sour. But the best ones resist the temptation to devote
management time and resources to trying to fix every loser in their portfolio at the expense of nurturing their
winners. The simple fact is that the average fund can gain much more from turning a good company into a
great one than from trying to rescue a bad one. A Bain study that simulated alternative outcomes for a set of
funds from vintage years 1995 to 2007 found that investing to go from good to great has three times greater
impact than trying to lift a money-losing investment marginally above breakeven.
The irony is that “good” companies tend to get less attention from PE management because they are generally on
track. That leaves underperformers to soak up scarce time and resources. Firms responding to the PE OPEN survey
said they devote, on average, 40% of portfolio resources to deals promising less than two times their invested
capital. Some said they are expending as much as 60% to turn around deals that won’t likely return their cost
of capital. Most funds simply can’t afford that kind of inefficiency, especially in the Asia-Pacific region, where
talent on the ground is limited and leadership constantly needs to make trade-offs to address new challenges.
Eventually every portfolio sorts itself into the losers and winners. The best GPs have the discipline to redirect
resources from one to the other, boosting their overall portfolio performance in the bargain.
Identifying barriers to value creation: A self-assessment
Bain’s Global Private Equity Report 2015 pointed out that the most successful PE firms around the world share
another trait: They quickly transition from thinking like acquirers to acting like value creators. Before the ink has
dried on the deal contracts, they are mobilizing with company management to draft a value-creation plan and put
it into motion. For PE firms in the Asia-Pacific region, this is a particularly daunting challenge. Aging portfolios,
a persistent overhang of dry powder and unrealized capital, and volatile exit markets each steal time that fund
management might otherwise devote to working with the most promising portfolio companies to help improve
them. What follows is a set of questions designed to help these firms evaluate whether they are devoting enough
time to these five building blocks. They also will help firms consider how they might adjust their priorities to
build more sustainable performance.
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Asia-Pacific Private Equity Report 2015 | Bain & Company, Inc.
•
Has your firm developed Repeatable Models® for creating value in portfolio companies, and does it have
the commitment of the deal partners?
•
Does your firm have formal processes in place—endorsed by senior partners—that enable it to pivot quickly
from deal making to value creation as soon as a deal closes?
•
At each of your portfolio companies, are management and operating partners aligned on the short list of
priority initiatives that will really move the needle on equity value creation?
•
Has your firm built a network of C-level executives it can call upon to manage a portfolio company as the
need arises?
•
Is there consensus among your deal and operating partners about which portfolio companies have potential
to go from good to great, and does your firm back those companies with sufficient resources to help them
become big winners?
•
Does your firm conduct periodic reviews of each portfolio company and adjust both near-term and long-term
objectives to accommodate changing macroeconomic conditions, new portfolio company challenges and
opportunities, and shifting industry dynamics?
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Asia-Pacific Private Equity Report 2015 | Bain & Company, Inc.
Market definition
The Asia-Pacific private equity market as defined for this report
Includes
• Investments and exits with announced values of more than US$10 million
• Investments and exits completed in the Asia-Pacific region: Greater China (China, Taiwan and
Hong Kong), India, Japan, South Korea, Australia, New Zealand, Southeast Asia (Singapore,
Indonesia, Malaysia, Thailand, Vietnam, the Philippines, Laos, Cambodia, Brunei and Myanmar)
and other Asia-Pacific countries
• Investments that have closed and those at the agreement-in-principle or definitive agreement stage
Excludes
• Bridge loans, franchise funding, seed and R&D deals
• Any non-PE or non-VC deals (e.g., M&A, consolidation)
• Real estate and infrastructure (e.g., airport, railroad, highway and street construction; heavy
construction; ports and containers; and other transport infrastructure)
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Asia-Pacific Private Equity Report 2015 | Bain & Company, Inc.
Key contacts in Bain’s Global Private Equity practice
Global: Hugh MacArthur (hugh.macarthur@bain.com)
Asia-Pacific: Suvir Varma (suvir.varma@bain.com)
Australia: Simon Henderson (simon.henderson@bain.com)
Greater China: Weiwen Han (weiwen.han@bain.com) and Kiki Yang (kiki.yang@bain.com)
India: Arpan Sheth (arpan.sheth@bain.com)
Japan: Jim Verbeeten (jim.verbeeten@bain.com)
Korea: Wonpyo Choi (won-pyo.choi@bain.com)
Southeast Asia: Sebastien Lamy (sebastien.lamy@bain.com)
Europe, Middle East and Africa: Graham Elton (graham.elton@bain.com)
Americas: Bill Halloran (bill.halloran@bain.com)
Please direct questions and comments about this report via email to bainPEreport@bain.com
Acknowledgments
This report was prepared by Suvir Varma, a Bain & Company partner based in Singapore, who leads the firm’s
Asia-Pacific Private Equity practice; Usman Akhtar, a partner based in Jakarta and a member of Bain’s Southeast Asia
Private Equity practice; and a team led by Johanne Dessard, who manages the firm’s Asia-Pacific Private Equity practice.
The authors wish to thank Vinit Bhatia, Michael Thorneman, Weiwen Han, Kiki Yang, Sebastien Lamy, Srivatsan
Rajan, Arpan Sheth, Madhur Singhal, Wonpyo Choi, Jim Verbeeten, Simon Henderson and Nic Di Venuto for their
contributions; Rahul Singh for his analytic support and research assistance; and Michael Oneal for his editorial support.
We are grateful to Preqin and Asia Venture Capital Journal (AVCJ) for the valuable data they provided and
for their responsiveness.
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Asia-Pacific Private Equity Report 2015 | Bain & Company, Inc.
Page 30
This work is based on secondary market research, analysis of financial information available or provided to Bain & Company and a range of interviews
with industry participants. Bain & Company has not independently verified any such information provided or available to Bain and makes no representation
or warranty, express or implied, that such information is accurate or complete. Projected market and financial information, analyses and conclusions contained
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